Vijay Kedia | Outlook Business
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Soumik Kar

My Best Pick 2018

Vijay Kedia
The managing director of Kedia Securities finds Everest Industries the perfect proxy to play the housing-for-all theme

Roti, kapda aur makaan still continue to be the stuff that commoners in this country are grappling to fulfill. Against such a backdrop, there is one such company which is touching the lives of millions of people across all classes of the society by providing products and solutions to help them build their dream homes. Having established its presence in rural India, Everest Industries, which is into asbestos, boards & panels and pre-engineered buildings, is now venturing into semi-urban and urban areas. Its USP lies in catering to different segments of the real estate market. Everest offers a complete range of roofing, ceiling, wall, flooring and cladding products and pre-engineered steel buildings, which are distributed through a large network. The company sells its products across 100,000 villages and 600 cities in India, and also exports to over 35 countries.

As good as it gets
As per the 2011 Census, 60% of Indian houses were classified as pucca [permanent housing], 28% semi-pucca [semi-permanent] and 12% as kutcha [mud-house].

In India, almost 60% of rural population uses thatched roof/tiles for shelter. Thatched roof needs regular replacement and tiled roof requires continuous maintenance. Therefore, whenever economic conditions improve, the first choice of the rural poor is to replace the roof over their head with an affordable and relatively durable product such as cement asbestos sheets.

With an increase in the allocation to 23,000 crore in FY18 for the Pradhan Mantri Awas Yojana — Gramin and proposal to complete 10 million houses by 2019, for the homeless people living in ‘kuchha’ houses, rural demand is bound to grow. While there are 20 players in the industry with 53 manufacturing plants, Everest, with a focus on R&D, is expected to introduce better value-added products. The rollout of Everest Super Colour anti-fungal roofing sheets has received excellent response in strategic markets such as West Bengal. During its life cycle, asbestos loses colour and also has issues of fungus formation, which is a drag on product sales. To overcome this, Everest introduced the anti-fungal roofing sheet, which is expected to change the perception about asbestos. It is a value-added product that will also fetch higher margin. If successful, it can account for a higher share of revenues in the coming years.

The addressable market for boards and panels is estimated at around 40,000 crore, growing at an average rate of 20%. There are six players in the industry producing identical or similar products with an annual capacity of approximately 4.7 lakh MT. India is underpenetrated in terms of consumption of fibre cement boards. Consumption in India is at 0.2 kg/person compared with 5 kg/person in Thailand and 3.4 kg/person in US. Boards and panels are gaining acceptance in the commercial segment. Demand from hotels, hospitals, organised retail and office space is expected to spur growth in this segment.

Everest is also coming up with innovative ideas to market boards and panels as a complete solution, such as providing space for concealed wiring inside the boards and panels so that it can be used for multiple means. Currently, Everest’s market share in boards and panels is around 25% and the management expects demand in this segment to increase over three-fold in the coming years.

The current domestic market for pre-engineered buildings (PEB) is estimated at around 10,000 crore and is growing at 16%. PEB results in 30% faster construction compared with traditional masonry construction. Everest has emerged as the second-largest PEB company in the country, having designed and erected more than 2,000 PEBs. It has also worked with customers to introduce risk mitigation clause for future contracts in case of significant changes in steel prices. A recovery in private capex could also result in rub-off on this segment in the medium to long term.

A next-gen product, solar roof is expected to create a new market for in-roofing solutions. Globally, solar roofs have started gaining traction. Everest is incorporating solar roofs in its PEB as a complete solution and is also arranging financing for such installations. Offering a complete solution is unique in the PEB segment and should spur growth in the coming years. The government’s focus to connect tier-II and tier-III towns via air routes will also help the company to promote its modern smart steel building technologies.

Built to last
Over the past decade, Everest’s revenue has multiplied by five times. The company’s foray into the Middle East was met with a setback that resulted in muted growth in the recent past. However, it has taken corrective measures, which will reflect in its financials in coming quarters. Going forward, topline is expected to grow by 15%-20% and bottom-line at a similar or a higher rate.  

The introduction of GST had an initial impact but it seems to be a game changer for Everest. All its major products — roofing, boards, panels, PEB, smart steel buildings, and metal roofing will be taxed at 18% GST. This should result in making the retail range of products more affordable and benefit a larger section of the society. The prices of PEB and smart steel buildings will be on par with those of the unorganised players and will, thus, expand the market for the company.

Despite the second quarter of FY18 being a lean one, the firm showcased a relatively better performance. Revenue for Q2FY18 came in at 259 crore, a growth of 7.5% YoY. Operating profit stood at 11.35 crore against a loss of 2.97 crore in the same quarter last year. The company was back in the black with a profit of 4.5 crore against a loss of 7.7 crore in the same quarter last year. Besides, PAT margin, too, expanded by 489 bps.

Going ahead, macro factors such as a surge in rural housing demand, GST and a good monsoon will drive growth in building products. Next-gen products will also expand the overall opportunity size and drive revenue. Government initiatives such as Swachh Bharat Abhiyan, Housing for All by 2022 and Smart City Mission should drive additional demand for building products, whereas a pick-up in private capex will accelerate growth in PEBs.

Everest enjoys a leadership position in the industry and has a strong brand recall with a large distribution network. Its next-gen products offer higher scalability and better profitability amid low competition. I bought into the stock at 360 levels, when it was trading at 13x estimated FY18 earnings. Since then the price has gained over 40% to its current level of 520. Though I believe the long-term story of Everest is intact, patient investors can wait for an opportune correction to enter the stock at an attractive valuation.

The writer has a position in the stock

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